Coronavirus ~ What it means for the global financial markets & economic growth ~
On April 13th, HoyleCohen hosted a conference call with Kent Chan, an equity specialist at Capital Group. Kent has a unique first-hand perspective of pandemics and the recoveries that ensued, having lived in China during the SARS and MERS health crises. He shared his perspective on COVID-19, its impact on the global economy and the implications for financial markets. Kent combined a thoughtful sense of optimism with a healthy dose of realism. He acknowledged that high levels of uncertainty would persist while also citing reasons for optimism as we look to 2021.
The emergence of COVID-19 has challenged scientists around the world as they seek to learn more about this novel virus. While we may be a year or more away from a vaccine, there are a growing number of potential treatments that could alleviate its affects in the near term. This is a bright spot in an otherwise murky picture.
As if the human toll were not bad enough, the virus brought the longest bull market on record to a screaming halt. In just 22 days, the U.S. equity market declined more than 20% from its February peak, marking the fastest decline into bear market territory from a market peak ever recorded. Since then, we’ve seen a partial recovery but market volatility has been far from normal.
Social distancing has resulted in a shutdown of entire sectors of the U.S. and global economy, causing significant financial hardship for many. Roughly 22 million people filed for unemployment in the first four weeks of the crisis, and many small businesses are trying to stay afloat while fixed costs accumulate at a time when revenue has evaporated. The consensus among economists is that we and many parts of the world have already entered a recession with significant reductions in Gross Domestic Product (GDP) expected in the very near term.
On a positive note, monetary and fiscal support has been much quicker and larger in magnitude than we’ve ever seen. Central banks and politicians understand that providing liquidity in times like this is vital. Many programs are designed to require that businesses maintain or rehire their workforces. The result is a multi-trillion-dollar effort to help address the immediate economic disruption and limit the permanent damage. The long-term effects of ballooning fiscal deficits remain to be seen, but spending is needed to avoid Depression Era levels of economic activity.
Having spent many years working in China, Kent shared his observations on how they and other Asian countries have handled the crisis. He remarked that these countries have tended to be more prepared because they have experienced prior pandemics. In addition to having a culture of mask-wearing, most are better prepared to test, contact trace, and enforce isolation. The result has been a quicker ‘flattening of the curve’ and re-opening of economic activity. Kent acknowledged that this process is new and unfamiliar to the United States and much of Europe. He anticipates a staged re-opening of the U.S. economy between May and July but acknowledged the need to prepare for a resurgence in cases.
What remains to be seen is how quickly and to what extent the consumer will re-engage in prior consumption habits. His experience has taught him that life adjusts and adapts but eventually returns to a new version of normal that includes robust and vibrant commerce.
He and his colleagues at Capital Group spend a lot of time thinking about the nature of the financial market decline and subsequent recovery. In general, massive economic shocks follow one of a few basic patterns:
- “V” – a sharp decline and sharp recovery
- “W” – a sharp decline followed by a slight recovery then another decline before making a triumphant return
- “U” – a sharp decline followed by a protracted period of malaise or challenge before eventual recovery
- “L” – a sharp decline followed by a sustained period of weakness
In Kent’s view, the cause of the current bear market has been an unexpected “shock” or “black swan event”, not a “cyclical” collapse caused by overheated asset prices or general over-exuberance. In fact, the fundamentals of the economy and of global business were relatively strong as we entered 2020. While the average recession has historically lasted 13 months, recessions caused by event-driven shocks have not lasted as long on average. He noted the recession of 1918, which occurred amidst the Spanish Flu, spanned just 7 months. It occurred at a very different time amidst World War I.
What this economic or market recovery will look like is impossible to predict with accuracy at this time given uncertainties around the virus and the timing of potential treatments. Kent noted, however, that financial markets will not wait until conditions improve materially before advancing in anticipation of progress. In fact, he noted that markets tend to lead economic recovery by 3-6 months. As a result, he feels that if most investors believe the U.S. and global economy will rebound sometime in 2021, the financial markets should begin to reflect that optimism yet this year. How much and how fast is anybody’s guess at this point.
If you reached just one conclusion as you listened to Kent, it’s that now is not a time to take unusual actions related to your investment portfolio. The business world has continued to advance through all sorts of calamities, and history has rewarded the long-term investor repeatedly. Kent feels that this time should be no different.
We appreciate Kent’s participation in this webinar. In a world with relentless “Breaking News” and inordinate amounts of data, we hope this webinar offered some valuable perspective.
About the HoyleCohen Investment Platform & Process
The HoyleCohen investment platform was designed with a simple mission – to enable each client to meet or exceed the return objectives needed to fulfill his or her life goals over the long-term at acceptable levels of volatility and risk. Each HoyleCohen Advisor shapes this platform by knowing each client’s needs and by actively participating in an Advisory Board which directs the HoyleCohen Investment Committee and Investment Department.
The HoyleCohen Investment Committee (IC) continuously monitors conditions and meets on a regular basis to discuss economic and market dynamics, opportunities and risks, and investment due diligence. The IC also reviews research and gets perspectives from various sources to inform our view of long-term capital market assumptions that might alter our future portfolio positioning. As part of this process we review information from a host of leading experts.
While our portfolios have not been immune to the recent market declines and volatility, our approach of diversifying portfolios and incorporating alternative sources of income and growth has provided some resiliency. A properly allocated portfolio will have more and less volatile components. This allows those needing distributions to rely on the more stable parts of a portfolio during volatile times while others can simply stay the course. We also re-balance portfolios periodically in order to maintain each client’s long-term strategic allocation and objectives.
We are proud of our investment process and capabilities. Let us know if you have any questions about them. And, keep us in mind if someone you know would benefit from speaking with a HoyleCohen Advisor.